Ch20 - 2015

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2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible ebsite, in hole or in part.

Comprehensive Volume

1

Chapter 20

Corporations! "istributions in

Co#plete Li$uidation and an%vervie o& Reorgani'ations

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(he )ig *icture +slide 1 o& 2

- Mr. and Mrs. Albert #ithson have built asuccess&ul business, but they believe the ti#ehas co#e &or the# to thin/ seriously about

retire#ent.- (hey on all o& the stoc/ in %range, a

C corporation.

(heir stoc/ invest#ent has a basis o& 200,000.(he business, hich is in the 34 inco#e ta

brac/et, ons net assets that are orth 3 #illionand have a basis o& 1.5 #illion.

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(he )ig *icture +slide 2 o& 2

- 6n&ortunately, the #ithsons have no &a#ily#e#bers ho are interested in carrying on the

business, so they #ust resort to li$uidating %rangeCorporation. (heir strategy, in general, is to convert the value o& their

business into a diversi&ied port&olio o& #ar/etablesecurities and to live o&& the earnings.

- (he #ithsons reali'e that such a plan ill be

taable. (hey ould li/e to /no the a#ount that ill be availablea&ter paying all 7ederal taes.

- Read the chapter and &or#ulate your response.

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Li$uidations89n :eneral

- Corporation inds up a&&airs, pays debts, and

distributes re#aining assets to shareholders

*roduces sale or echange treat#ent to shareholder

Li$uidating corporation recogni'es gains and

losses upon distribution o& its assets, ith certain

eceptions

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Li$uidations8;&&ect on Corporation+slide 1 o&

- :ain or loss is recogni'ed by corporation on

distribution in co#plete li$uidation

Loss #ay be disalloed or li#ited i&!

- *roperty distributed to related parties- *roperty distributed has built

Result! Li$uidating distribution sub?ect to corporate level

ta +gain, and shareholder level ta +receipt o& proceeds

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Li$uidations8;&&ect on Corporation+slide 2 o&

- Li#itations on losses8Related *artyituationsLosses are disalloed on li$uidating distributions

to related parties i&!- "istribution is not pro rata

9n pro rata distributions, each shareholder receives their shareo& each asset

- *roperty distributed is dis$uali&ied property "is$uali&ied property is property ac$uired by corp in a @51transaction during the &ive

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Li$uidations8;&&ect on Corporation+slide o&

- Li#itations on losses8)uilt

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(he )ig *icture ;a#ple 3

Antistu&&ing Rules +slide 1 o& 2

- Return to the &acts o& (he )ig *icture on p. 20

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Antistu&&ing Rules +slide 2 o& 2

- A sale or li$uidating distribution o& theproperty by %range Corp. ould result in a35,000 loss.

55,000 +&air #ar/et value o& property < 100,000+property basis.

- i#ilarly, a sale by the #ithsons o& the stoc/

ac$uired in the @ 51 echange ould alsoresult in a 35,000 loss.55,000 +&air #ar/et value o& stoc/ < 100,000

+stoc/ basis.

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"istribution o& Loss *roperty in

Li$uidation

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Li$uidations8;&&ect on hareholder+slide 1 o& 2

- :ain or loss recogni'ed on receipt o& property

&ro# li$uidating corporation

A#ount 7M> o& property received < basis in

stoc/

- :enerally, capital gain or loss

)asis in assets received in li$uidating distribution

7M> on date o& distribution

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Li$uidations8;&&ect on hareholder+slide 2 o& 2

pecial rule &or install#ent obligations

- hareholder #ay de&er gain recognition to point o&

collection

- Corporation #ust recogni'e all gain on distribution

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(a *aid %n Bet :ain +slide 1 o& 2


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(a *aid %n Bet :ain +slide 2 o& 2

- Assu#ing the #ithsons decide to

li$uidate the corporation and the taes the

corporation pays total D50,000.(he a#ount reali'ed by the #ithsons is

,150,000 +3,000,000 < D50,000.

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(a *aid %n Bet :ain


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Li$uidations! *arent

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;lection 6nder @D+slide 1 o& 3

- *arent #ay elect to treat ac$uisition o& stoc/ in

ac$uired corp as a purchase o& the ac$uired

corp.=s assets i&!

;lection is #ade by &i&teenth day o& ninth #onth

&olloing $uali&ied stoc/ purchase

- Huali&ied stoc/ purchase occurs hen corp ac$uires

stoc/ representing at least D04 o& voting poer andvalue ithin a 12

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- (a Conse$uences

*arent corp has basis in subsidiary=s assets basis

in subsidiary=s stoc/

- ubsidiary #ay, but need not, be li$uidated

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;lection 6nder @D+slide o& 3

- (a Conse$uences +cont=d

ubsidiary is dee#ed to have sold its assets &or an

a#ount deter#ined ith re&erence to parent=s basis

in subsidiary=s stoc/, ad?usted &or liabilities o&subsidiary

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- (a Conse$uences +cont=d

:ain or loss is recogni'ed by subsidiary

ubsidiary is treated as a ne corporation that

purchased all o& its assets on the day a&ter the

$uali&ied stoc/ purchase date

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Reorgani'ations89n :eneral

- Re&ers to any corporate restructuring that #aybe ta

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u##ary o& "i&&erent (ypes

o& Reorgani'ations

- (he ter# reorgani'ation includes!

tatutory #erger or consolidation

toc/ &or stoc/ echange

toc/ &or assets echange

"ivisive echange

Recapitali'ation

Change in identity, &or#, or place o& organi'ation

(rans&ers in ban/ruptcy or receivership

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(a 7ree Reorgani'ation

Conse$uences, in :eneral +slide 1 o&

- Conse$uences to Ac$uiring Corporation

Bo gain or loss recogni'ed unless it trans&ers

property to the (arget corporation as part o& the

transaction- (hen gain, but not loss, #ay be recogni'ed

)asis o& property received retains basis it had in

hands o& (arget corp plus any gain recogni'ed bythe target

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Conse$uences, in :eneral +slide 2 o&

- Conse$uences to (arget Corporation

Bo gain or loss unless it retains Jother propertyK

received in the echange or it distributes its on

property to shareholders- %ther property is de&ined as anything received other

than stoc/ or securities

(reated as boot

- :ain, but not loss, #ay be recogni'ed

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Conse$uences, in :eneral +slide o&

- Conse$uences to (arget or Ac$uiring Co.hareholdersBo gain or loss unless shareholders receive cash or

other property in addition to stoc/- Cash or other property is considered boot

:ain recogni'ed by the stoc/holder is the lesser o& the bootreceived or the reali'ed gain

)asis o& shares received is sa#e as basis o& thosesurrendered, decreased by boot received, increasedby gain and dividend inco#e, i& any, recogni'ed inthe transaction

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Co#parison o& Reorgani'ation (ypes+slide 1 o& 5

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Co#parison o& Reorgani'ation (ypes+slide o& 5

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Re&ocus %n (he )ig *icture +slide 1 o&

- (he #ithsons are ise to evaluate thea&&ordability o& their retire#ent planbe&ore they sell or li$uidate theirbusiness.

- Bonetheless, a&ter pay#ent o& inco#e taat both the corporate and shareholderlevels, they ill net only 2,5I0,000 &ro#the sale o& their 3 #illion business.

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- peci&ically, in the event the corporation is

able to sell the business assets &or 3 #illion,

the reali'ed gain o& 2.5 #illion ill give rise

to 7ederal inco#e ta o& D50,000 +2,500,000 34.

- 7olloing the pay#ent o& the corporate

inco#e ta, the net proceeds to the #ithsonsill be ,150,000.

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Re&ocus %n (he )ig *icture +slide o&

- A&ter o&&setting the a#ount reali'ed &ro# theli$uidation by their stoc/ basis o& 200,000, theircapital gain o& 2,E50,000 ill be sub?ect to capitalgains ta o& 5E0,000+2,E50,000 204.

- (here&ore, the net a&ter

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What If?

- 9nstead o& the co#plete li$uidation transaction

?ust described, the #ithsons should consider

alternatives that could produce a better ta

result such as the &olloing.

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What If?

9& the #ithsons are able to &ind a buyer ho is interested

in #aintaining the business in the current corporate &or#,

they should try to sell their stoc/ in the business rather than

selling the business assets in li$uidation.

- 9& the buyer is illing to pay 3 #illion &or the corporation=s stoc/,

the #ithsons ould recogni'e a capital gain o& .D #illion and

have ,230,000 a&ter ta +3 #illion proceeds capital gains ta

o& I0,000. (his approach ould increase the net a&ter

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Re&ocus %n (he )ig *icture +slide I o&

What If?

- Another approach ould be to atte#pt to #ar/et thecorporation as a potential ta/eover target in a ta

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Re&ocus %n (he )ig *icture +slide o&

What If?

- An obvious advantage o& this approach is that gain

&ro# the disposition o& their stoc/ ould be de&erred

until the stoc/ in the ac$uiring corporation is sold in ataable transaction.

- Foever, a disadvantage the #ithsons ould need

to evaluate is that they ould not be able to build a

diversi&ied port&olio.

(heir invest#ent holdings ould largely, i& not co#pletely,

consist o& the stoc/ o& the ac$uiring corporation.

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Ch20 - 2015